Home Office, Branch, and Agency Accounting

I. Introduction

The branches of an enterprises are not separate legal entities, they are separate economic and
accounting entities whose special features necessitate accounting procedures tailored for those features, such
as the reciprocal accounts. On the other hand, the sales agency is also not a separate business entity.

In this type of business set-up, one location referred to as the home office is usually the base of
operations wherein branches and agencies are maintained on different business locations depending on the
function and mode of operation.

II. Accounting for Branch Operations

Branch is used to describe a business unit located at some distance from the home office. This unit
carries merchandise obtained from the home office, generates sales, approve customer's credit, and makes
collections from its customers. They may also obtain merchandise from outside suppliers. The cash receipts of
the branch are often deposited in a bank account and branch expenses are paid from an imprest cash fund.

III. Accounting for Agency Operations

An agency is an unincorporated entity in which orders are received and then transmitted to the home
office for processing, shipping and billing of merchandise. They do not have merchandise available for sale,
but they maintain samples inventory, they rarely collect cash from customers, since collections are remitted by
customers directly to the home office.
Ordinarily, the only accounting records required for sales agencies are for cash receipts and disbursements, which are
handled in essentially the same manner as a petty cash fund system.

PROBLEM A. Lenovo Company opens an agency Tagkawayan QC. The following are the transactions for January 2020:

• The following are shipped to the agency: Samples – P100,000; advertising materials- P30,000. Samples used are
75% and the advertising materials used are 35%.
• Home office sends a check for P50,000 to the agency as its working fund.\
• The home office fills up sales order sent by the agency for P1,000,000 worth of merchandise and the cost of
merchandise shipped is P750,000
• The agency collections amount to P735,000, net of 2% discount.
• The agency’s working fund is replenished for the following:

Rentals P10,000
Delivery expenses 3,500
Maintenance 7,500
Store supplies 1,000
1. How much is the agency net income (loss) for the month ended, January 31, 2020?

PROBLEM B. the following are the account closing balances of Loud Company and its Mapulot Branch as at
January 1, 2020:
Home Office Mapulot Branch
Cash P125,000 P105,000
Accounts receivable 150,000 120,000
Inventories 300,000 240,000
Property and equipment 200,000 150,000
Less: Accumulated Depreciation 30,000 30,000
Investment in Mapulot 420,000
Total Assets P1,165,000 585,000

Accounts payable 345,000 160,500

Accrued expenses 12,000 4,500
Home office current 420,000
Share capital 500,000
Retained earnings 308,000
Total Equities 1,165,000 585,000
The following is the summary of the transaction of the home office and its branch for 2020:

• Home office shipped merchandise costing P240,000 to the branch.

• Purchases from outsiders: home office- P1,200,000, branch- P200,000.
• Sales on account: home office- P1,500,000, branch- P1,000,000.
• Home office’s collections amounted to P800,000 which includes P100,000 from a branch customer who paid
directly his account to the home office. Branch’s own collections amounted P250,000.
• Home office paid P400,000 of its own accounts and P150,000 of that of the branch’s payable while the branch
paid P250,000 of its own accounts.
• Operating expenses paid: home office- P300,000; branch-P90,000.
• Depreciation on plant assets is 10% per annum.
• General and administrative expenses allocated by the home office to the branch amounts to P150,000.
• Branch remittance to the home office is P25,000.
• At December 31, the inventories of the home office and the branch are P300,000 and P175,000 respectively. Of
the branch inventories on hand, 25% came from outside purchases

1. Prepare journal entries to record the foregoing transactions in the books of the home office and the
branch?
2. How much is the branch reported net income (loss)?
3. How much is the combined net income of the home office and branch?
4. How much is the total inventories in the combined statement of financial position as of December 31, 2020?

PROBLEM C. The following selected transaction took place between the home office and its two branches, Calauag and
Lopez Branch. Merchandise shipments to the branches are billed at 25% above cost.

• Home offices shipped merchandise to its Calauag costing P400,000.

• Home office sent cash of P500,000 to Lopez branch.
• Upon instruction of the home office, Lopez branch effected a fund transfer of P100,000 to Calauag branch.
• Lopez branch collected Calauag branch accounts receivable of P400,000 less 2% discount.
• Lopez branch paid P200,000 representing the travelling expenses of Jennifer Gyo, when the latter attended a
seminar in Okinawa. Of the amount paid, 60% was charged to the home office, 20% to Calauag branch and the
balance to Lopez branch.
• Calauag branch paid accounts payable of the home office and that of Lopez branch amounting to P30,000 and
P20,000 respectively.
• Home office shipped merchandise to Lopez branch with a total billed price of P200,000. The home office paid
freight of P5,000 for the account of the receiving branch.
• Home office subsequently instructed Lopez branch to reship one-half of the goods to Calauag branch. Additional
freight of P1,000 was paid by Lopez branch. Had the goods been shipped directly from home to Calauag branh,
the freight would have been P3,000 only.

1. Prepare journal entries to record the foregoing transactions in the books of the home office and its two
branches?
2. What is the balance of investments in Lopez branch in the books of the home office?
3. What is the balance of the home office account on the books of Calauag?
PROBLEM D. The discrepancies enumerated below were discovered in the inter-office accounts of Eva Trading
Company with its Quezon branch:
a. Merchandise shipments of P75,000 which were made by the home office on December 28, 2020 were received by
the branch on January 4, 2021.
b. The branch collected P235,000 of its own accounts and another P25,000 from a home office customer who
erroneously paid his account to this branch. All of these collections were immediately deposited for the account of
the home office. Meanwhile back at the home office, no entry has been made as of December 31, 2020.
c. A home office for labor amounting to P1,200 was recorded twice by the branch.
d. A charge of P200 was made by the home office for freigt on merchandise but the amount recorded by the branch
is P2,000.
e. A charge for 45,000 (furniture and fixtures) on the home office books was taken by the branch as P4,500
f. The home office had incorrectly charged the branch the amount of P12,500 fro repairs cost. However, the branch
has made no entry.
g. The home office corrected the entry in (f) on January 2, 2021 and a credit memo was inadvertently sent to the
branch which subsequently made the corresponding entry on December 31, 2020 based on the credit memo.

The inter-office accounts were in balance as of January 1, 2020. The balance of the inter-office account on the
home office books as of December 31, 2020 was P727,000.

1. How much is the adjusted balance of the inter-office account as of December 31, 2020?
2. What is the unadjusted balance of the inter-office account on the books of the branch as of December
31, 2020?

PROBLEM E. The following information is given regarding B Company:

• The reciprocal account in the separate income statement of the home office amount to P256,000.
• During the year 2020 (current year), the home office shipped merchandise to the branch at a 125% mark-up on
cost.
• The beginning inventory of the branch is P70,000.
• During the 2020, the branch purchased from own suppliers merchandise amounting to P110,000.
• The ending inventory of the branch as shown in the combined financial statements is P345,000.
• The allowance for overvaluation before adjustment is P336,000.
• The beginning inventory of the branch from the home office at cost is P40,000.
• The unrealized profit at the end of the year must be decreased by P10,400.

1. How much is the beginning inventory of the branch from outsiders?

2. How much is the total available for sale of the branch?
3. How much is the ending inventory of the branch from outsiders?
4. How much is the cost of goods sold to the branch?